In this week’s content analysis, we will be drawing parallels between StockPointer’s reports on Garmin Ltd and a recent Globe and Mail article (link) covering the company. David Milstead, in his article “Garmin: Is the GPS maker the next BlackBerry”, published June 11th, brings to light many of the difficulties that Garmin has faced in recent years—as well as those it can expect to encounter in the future—because of the widespread development on smartphones with integrated GPS functionalities. Thankfully, Garmin has been successful at diversifying its sources of revenue: 75% of the company’s 2007 revenue stemmed from automobile GPS sales, down to only 40% today. Fitness devices now represent the fastest growing business segment, and demonstrates the highest potential moving forward. 
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This strategic repositioning has slowed the fall in its economic performance, but EVA clearly indicates that the company is no longer able to generate shareholder wealth—its 12-month EVA has been negative since September 2014. Over the fiscal year finishing with its Q1 2015 results, Garmin’s NOPAT (net operating profit after tax) was $366.1M; NOPAT was $698.3M over the prior 12-month period. Meanwhile, return on capital, now at 8.5%, is the lowest in five years, and is currently below the company’s cost of capital at 9.6%.
From a value perspective, GRMN is trading at a P/IV ratio of 1.52, indicating a share price well above its intrinsic value, and representing considerable investment risk. Further, intrinsic value has been dropping on a fairly consistent basis since 2010. Future growth value (FGV) tells the same story: market value is presently 55% above current operating value (COV), despite the absence of any real top or bottom-line growth.
You’ll note that we held GRMN in our ADR model portfolio from August 2010 ($28.51) to October 2014 (55.48), at which date we sold the position due to its first ever negative-EVA quarter. It doesn’t appear that Garmin’s situation has, for the moment, improved. The arrival of new competitors in the fitness device space (Fitbit, Google, Apple, etc.) may further complicate the outlook facing Garmin’s management.
